2016-04-28 08:00:02 CEST
2016-04-28 08:00:02 CEST
REGULATED INFORMATION
Fortum - Interim report (Q1 and Q3)
Fortum Interim Report January−March 2016: Satisfactory results, considering continuously weak power prices
FORTUM CORPORATION INTERIM REPORT JANUARY-MARCH 2016 28 April 2016 at 9:00 EET
January−March 2016, continuing operations
-- Comparable operating profit EUR 275 (343) million, -20%
-- Operating profit EUR 369 (350) million, of which EUR 94 (7) million relates
to items affecting comparability
-- Earnings per share EUR 0.37 (0.33), +12%, of which EUR 0.08 (0.01) related
to items affecting comparability. Earnings per share in the corresponding
period of 2015, including the effect from discontinued operations, were EUR
0.40
-- Cash flow from operating activities totalled EUR 375 (516) million, -27%
-- Fortum completed its multi-year investment programme in Russia
-- Fortum acquired the Polish electricity and gas sales company Grupa DUON
S.A.
-- Fortum sold its 665-MW Tobolsk CHP plant in Russia
-- Fortum launched a new vision, strategic cornerstones and updated financial
targets
-- Fortum business structure reorganised and new Executive Management Team in
place as of 1 April 2016
Summary of outlook
-- Fortum continues to expect the annual electricity demand to grow in the
Nordic countries by approximately 0.5% on average in the coming years
-- Power and Technology segment's Nordic generation hedges: for the rest of
2016, approximately 60% hedged at approximately EUR 30 per MWh; for 2017,
approximately 30% hedged at approximately EUR 28 per MWh
-- Operating profit level (EBIT) for the Russia segment, RUB 18.2 billion, is
targeted to be reached during 2017-2018. The euro-denominated result level
will be volatile, due to the translation effect
Key financial ratios * 2015 LTM
-----------------------------------------
Return on capital employed, % 22.7 22.5
-----------------------------------------
Comparable net debt/EBITDA -1.7 -1.9
-----------------------------------------
* Key financial ratios are based on total Fortum, including discontinued
operations
Key figures I/16 I/15 2015 LTM
--------------------------------------------------------------------------------
Sales, EUR million 989 1,040 3,459 3,408
--------------------------------------------------------------------------------
Operating profit, EUR million
--------------------------------------------------------------------------------
continuing operations 369 350 -150 -131
--------------------------------------------------------------------------------
discontinued operations - 81 4,395 4,314
--------------------------------------------------------------------------------
total Fortum 369 431 4,245 4,183
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Comparable operating profit, EUR million
--------------------------------------------------------------------------------
continuing operations 275 343 808 740
--------------------------------------------------------------------------------
discontinued operations - 82 114 32
--------------------------------------------------------------------------------
total Fortum 275 425 922 772
--------------------------------------------------------------------------------
Profit before taxes, EUR million
--------------------------------------------------------------------------------
continuing operations 390 350 -305 -265
--------------------------------------------------------------------------------
discontinued operations - 80 4,393 4,313
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total Fortum 390 431 4,088 4,047
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Earnings per share, EUR
--------------------------------------------------------------------------------
continuing operations 0.37 0.33 -0.26 -0.22
--------------------------------------------------------------------------------
discontinued operations 0.07 4.92
--------------------------------------------------------------------------------
total Fortum 0.37 0.40 4.66 4.63
--------------------------------------------------------------------------------
Net cash from operating activities, EUR million, 375 516 1,228 1,087
continuing operations
--------------------------------------------------------------------------------
Shareholders’ equity per share, EUR 15.97 11.73 15.53
--------------------------------------------------------------------------------
Interest-bearing net debt (at end of period), EUR -2,158 3,714 -2,195
million
--------------------------------------------------------------------------------
Fortum’s President and CEO Pekka Lundmark:
“The key factor currently influencing Fortum’s business performance is the low
wholesale price of electricity. The situation is the same for our peer
companies, of which the majority are located outside of the Nordic countries.
Considering the low electricity prices, the first quarter results were quite
satisfactory. Fortum's comparable operating profit for continuing operations
totaled EUR 275 million, a decline of approximately EUR 70 million compared to
the first quarter in 2015. Profit before taxes was up by EUR 40 million and
totaled EUR 390 million. Earnings per share were EUR 0.37 compared to EUR 0.33
in the first quarter of 2015.
The highlights of the quarter operationally were the highest ever first quarter
hydro production, high utilisation rates in all nuclear power plants, and the
finalisation of the multi-year investment programme in Russia, where Fortum now
has 2,226 megawatts (MW) of new capacity receiving guaranteed payments. It was
also encouraging that the share of profits contributed by Fortum Värme
(co-owned with Stockholm city, Sweden) increased.
In February, we launched our new vision and strategic cornerstones. We also
adjusted our operational model to better enable the implementation; the new
structure has been in place since 1 April and consists of three business
divisions: Generation, City Solutions and Russia. In addition, two development
units focusing on growing new businesses have been established: M&A and Solar &
Wind Development as well as Technology and New Ventures.
At the same time, we have been screening opportunities in line with our
strategy. The latest transactions are the acquisition of the Polish electricity
and gas sales company DUON, as well as a wind power investment in Sweden. In
addition, we announced our targets and next steps in solar in April. We are
continuously looking to optimise our production fleet and hence we sold the
Tobolsk power plant in Russia.
Our target is to continuously strengthen our position in the current home
markets and wider Europe through consolidation. Although some European
economies have started to recover, industrial production is still weak,
commodity prices low and power demand has not recovered sufficiently to support
an increase in electricity prices. This is why we aim to utilise our know-how
and capital to create new revenue streams based on other value drivers than the
Nordic wholesale power price. However, due to the long-term nature of energy
investments, the change will take some time.”
Fortum’s new vision, strategic cornerstones and updated financial targets
In February, Fortum launched its new vision, strategic cornerstones and updated
financial targets. The new vision and strategy targets growth and continued
profitability with a strong focus on clean energy, customers and shareholder
value creation.
The long-term financial target for return on capital employed (ROCE) is revised
to at least 10%, while the target for comparable net debt to EBITDA, around 2.5
times, remains unchanged. Also the dividend policy remains unchanged.
Fortum's strategy has four cornerstones: (1) enhance productivity of the
current fleet and drive industry transformation, (2) create sustainable
solutions for growing cities and urban areas, (3) increase investments in solar
and wind power, and (4) build new energy ventures.
Disclosures for Fortum's capital structure and segment information
Fortum wants to have a prudent and efficient capital structure which at the
same time allows the implementation of its strategy. Maintaining a strong
balance sheet and the flexibility of the capital structure is a priority. The
Group monitors the capital structure based on the Comparable net debt to EBITDA
ratio. Net debt is calculated as interest-bearing liabilities minus liquid
funds. EBITDA is calculated by adding back depreciation and amortisation to
operating profit, whereas Comparable EBITDA is calculated by deducting items
affecting comparability and the net release of CSA provision from EBITDA.
Fortum's comparable net debt to EBITDA target is around 2.5.
ESMA (European Securities and Markets Authority) has issued new guidelines
regarding Alternative Performance Measures (“APM”) to be implemented at the
latest in the second quarter 2016. Fortum has defined and presented its APMs in
a consistent and comprehensive manner since 2005 and therefore the
implementation of the guidelines will only have limited effect on the
disclosures. When assessing the ESMA guidelines Fortum has now added a
reconciliation for one of its APMs, Comparable return on net assets (Note 4).
Presentation of segment note (Note 4) has been reorganised to a more condensed
presentation in order to give more coherent picture of the performance of the
reporting segments. Presentation is now in line with the format used in the
consolidated financial statements. In addition, Fortum is disclosing Comparable
net assets instead of Net assets from first quarter 2016 onwards.
Reorganisation of operations
Fortum has reorganised its corporate structure as of 1 April 2016. The target
of the new organisation is to enable the implementation of the company’s new
vision and strategy. The new organisation consists of three business divisions:
Generation, City Solutions and Russia. In addition, two development units
focusing on growing new businesses were established: M&A and Solar & Wind
Development as well as Technology and New Ventures.
Changes to Fortum's segment reporting are minor at this point and the company
will keep four reporting segments. The segments as of the second quarter 2016
are: Generation (mainly the former Power and Technology), City Solutions
(mainly the former Heat, Electricity Sales and Solutions) and Russia. M&A and
Solar & Wind Development as well as Technology and New Ventures will be
reported under Other. Some businesses will be repositioned due to the
reorganisation, but because of the minor financial impact at this point, the
comparable segment information for 2015 will not be restated.
After the divestment of the Swedish distribution business, Fortum has no
electricity distribution operations. The Distribution segment was reclassified
as discontinued operations as of the first quarter of 2015.
Financial results discussed in this interim report are for the continuing
operations of Fortum Group.
Financial results
Sales by segment
EUR million I/16 I/15 2015 LTM
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Power and Technology 474 500 1,722 1,696
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Heat, Electricity Sales and Solutions 392 406 1,187 1,173
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Russia 249 263 893 879
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Other 29 29 114 114
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Netting of Nord Pool transactions -120 -119 -336 -337
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Eliminations -34 -38 -122 -118
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Total continuing operations 989 1,040 3,459 3,408
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Discontinued operations - 180 274 94
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Eliminations - -20 -31 -11
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Total Fortum 989 1,200 3,702 3,491
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Comparable operating profit by segment
EUR million I/16 I/15 2015 LTM
------------------------------------------------------------
Power and Technology 153 203 561 511
------------------------------------------------------------
Heat, Electricity Sales and Solutions 56 58 108 106
------------------------------------------------------------
Russia 79 97 201 183
------------------------------------------------------------
Other -13 -15 -63 -61
------------------------------------------------------------
Total continuing operations 275 343 808 740
------------------------------------------------------------
Discontinued operations - 82 114 32
------------------------------------------------------------
Total Fortum 275 425 922 772
------------------------------------------------------------
Operating profit by segment
EUR million I /16 I/15 2015 LTM
----------------------------------------------------------------
Power and Technology 209 203 -396 -390
----------------------------------------------------------------
Heat, Electricity Sales and Solutions 61 64 105 102
----------------------------------------------------------------
Russia 111 98 203 216
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Other -12 -15 -62 -59
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Total continuing operations 369 350 -150 -131
----------------------------------------------------------------
Discontinued operations - 81 4,395 4,314
----------------------------------------------------------------
Total Fortum 369 431 4,245 4,183
----------------------------------------------------------------
January–March 2016
In the first quarter of 2016, sales were EUR 989 (1,040) million, the decrease
was mainly due to weak power prices. Comparable operating profit totalled EUR
275 (343) million and the reported operating profit totalled EUR 369 (350)
million. Fortum's operating profit for the period was affected by items
affecting comparability, including sales gains and IFRS accounting treatment
(IAS 39) of derivatives mainly used for hedging Fortum's power production and
nuclear fund adjustments for continuing operations amounting to EUR 94 (7)
million (Note 4).
The share of profit from associates was EUR 67 (58) million, of which Fortum
Värme represented EUR 44 (38) million. The share of profit from Hafslund and
TGC-1 are based on the companies' published fourth-quarter 2015 interim reports
(Note 14).
Net financial expenses were EUR -47 (-57) million. Net financial expenses
include changes in the fair value of financial instruments of EUR 2 (-8)
million.
Profit before taxes was EUR 390 (350) million.
Taxes for the period totalled EUR -59 (-55) million. The effective income tax
rate according to the income statement was 15.0% (15.8%). The comparable
effective income tax rate, excluding the impact of the share of profit from
associated companies, joint ventures as well as non-taxable capital gains, was
18.1% (19.0%) (Note 10).
The profit for the period for continuing operations was EUR 331 (295) million.
Earnings per share for continuing operations were EUR 0.37 (0.33), of which EUR
0.08 (0.01) per share relates to items affecting comparability. (Earnings per
share for total Fortum in the first quarter of 2015 including the effect from
discontinued operations were EUR 0.40).
Financial position and cash flow
Cash flow
In the first quarter of 2016, net cash from operating activities from
continuing operations decreased by EUR 141 million to EUR 375 (516) million,
mainly due to lower comparable EBITDA, higher taxes paid, and lower realised
foreign exchange gains and losses. Realised foreign exchange gains and losses
of EUR 132 (168) million were related to the rollover of foreign exchange
contract hedging loans to Fortum's Swedish and Russian subsidiaries. Total net
cash from operating activities including divested Distribution operations,
amounted to EUR 375 (603) million.
Capital expenditures increased by EUR 12 million to EUR 113 (101) million. Net
cash used in investing activities increased by EUR 333 million to EUR 379 (46)
million, mainly due to the acquisition of shares of EUR 104 (1) million and an
increase in interest-bearing receivables of EUR 176 (0) million. Cash flow
before financing activities, including the effect of divested Distribution
operations, decreased by EUR 518 million to EUR -4 (514) million.
Fortum paid dividends totalling EUR 977 million in April 2016.
Assets and capital employed
Total assets increased by EUR 328 million to EUR 23,095 (22,767 at year-end
2015) million.
Liquid funds were at the year-end level of EUR 8,228 (8,202 at year-end 2015)
million.
Capital employed was EUR 20,338 (19,870 at year-end 2015) million, an increase
of EUR 468 million.
Equity
Total equity attributable to owners of the parent company totalled EUR 14,191
(13,794 at year-end 2015) million.
The increase in equity attributable to owners of the parent company totalled
EUR 397 million and was mainly from the net profit of EUR 326 million for the
period and translation differences of EUR 100 million.
Financing
Fortum was net cash positive at the end of the period. Net cash decreased by
EUR 37 million to EUR 2,158 (2,195 at year-end 2015) million during the first
quarter of 2016.
At the end of March, the Group’s liquid funds totalled EUR 8,228 (8,202 at
year-end 2015) million. Liquid funds include cash and bank deposits held by OAO
Fortum amounting to EUR 129 (76 at year-end 2015) million. In addition to
liquid funds, Fortum had access to approximately EUR 2.2 billion of undrawn
committed credit facilities (Note 16).
Net financial expenses were EUR -47 (-57) million, of which net interest
expenses were
EUR -39 (-39) million. Net financial expenses include changes in the fair value
of financial instruments of EUR 2 (-8) million.
Fortum’s long-term ratings were unchanged. Standard & Poor's rating is BBB+ and
the short-term rating A-2. The outlook is stable. Fitch Ratings long-term
Issuer Default Rating (IDR) and senior unsecured rating is BBB+ while the
short-term IDR is F2 with a stable outlook.
Key figures
For the last twelve months comparable net debt to EBITDA was -1.9 (-1.7 at
year-end 2015).
Gearing was -15% (-16% at year-end 2015) and the equity-to-assets ratio 62%
(61% at year-end 2015). Equity per share was EUR 15.97 (15.53 at year-end
2015). For the last twelve months return on capital employed totalled 22.5%
(22.7% at year-end 2015).
Outlook
Key drivers and risks
Fortum's financial results are exposed to a number of economic, strategic,
political, financial and operational risks. One of the key factors influencing
Fortum's business performance is the wholesale price of electricity in the
Nordic region. The key drivers behind the wholesale price development in the
Nordic region are the supply-demand balance, the prices of fuel and CO2
emissions allowances, as well as the hydrological situation. The completion of
Fortum’s investment programme in Russia is also a key driver in the company’s
result growth, due to the increase in production volumes and CSA payments.
The continued uncertainty in the global and European economies has kept the
outlook for economic growth unpredictable. The overall economic uncertainty
impacts commodity and CO2 emissions allowance prices, and this could maintain
downward pressure on the Nordic wholesale price of electricity. In Fortum's
Russian business, the key factors are economic growth, the rouble exchange
rate, the regulation around the heat business, and further development of
electricity and capacity markets. In all regions, fuel prices and power plant
availability also impact profitability. In addition, increased volatility in
exchange rates due to financial turbulence could have both translation and
transaction effects on Fortum's financials, especially through the Russian
rouble and Swedish krona. In the Nordic countries, also the regulatory and
fiscal environment for the energy sector has added risks for utility companies.
Nordic market
Despite macroeconomic uncertainty, electricity is expected to continue to gain
a higher share of the total energy consumption. Electricity demand in the
Nordic countries is expected to grow by approximately 0.5% on average in the
coming years.
During the first quarter of 2016, the price of European Union emissions
allowances, oil and coal declined. The price of electricity for the upcoming
twelve months declined in the Nordic area as well as in Germany.
In late-April 2016 the quotation for coal (ICE Rotterdam) for the rest of 2016
was around USD 46 per tonne, and for CO2 emission allowances for 2016 about EUR
6 per tonne. The Nordic system electricity forward price in Nasdaq Commodities
for the rest of 2016 was around EUR 21 per MWh and for 2017 around EUR 21 per
MWh. In Germany, the electricity forward price for the rest of 2016 was around
EUR 25 per MWh and for 2017 around EUR 25 per MWh. Nordic water reservoirs were
about 7 TWh above the long-term average and 6 TWh above the corresponding level
of 2015.
Power and Technology
The Power and Technology segment’s achieved Nordic power price typically
depends on such factors as hedge ratios, hedge prices, spot prices,
availability and utilisation of Fortum's flexible production portfolio, and
currency fluctuations. Excluding the potential effects from changes in the
power generation mix, a 1 EUR/MWh change in the Power and Technology segment’s
Nordic power sales achieved price will result in an approximately EUR 45
million change in Fortum's annual comparable operating profit. In addition, the
comparable operating profit of the Power and Technology segment will be
affected by the possible thermal power generation volumes and its profits.
In Finland, the technical plan and cost estimates for nuclear waste management
are updated every third year. The new technical plan was published in 2015 and
related cost estimates will be updated during the second quarter of 2016, and
the updated nuclear waste liability will be decided by the Ministry of
Employment and the Economy by end of year 2016.
As a result of the nuclear stress tests in the EU, the Swedish nuclear safety
authority (SSM) has decided to propose new regulations for Swedish nuclear
reactors. The process is ongoing. Fortum emphasises that maintaining a high
level of nuclear safety is the highest priority, but considers EU-level
harmonisation of nuclear safety requirements to be of utmost importance.
In 2015, the Swedish Government increased the nuclear waste fund fee from
approximately 0.022 to approximately 0.04 SEK/kWh for the 2015-2017 period. The
estimated impact on Fortum is approximately EUR 25 million annually. The
process to review the Swedish nuclear waste fees is done in a three-year cycle.
However, as a result of the decision on early closure of nuclear power plants,
the Swedish Radiation Safety Authority, SSM, recalculated the waste fees for
the Oskarshamn and Ringhals power plants. The new assessment needs the approval
of the Swedish Government.
In addition, the Swedish Parliament decided to approve the proposed tax
increase of 17% on installed nuclear capacity. The tax was implemented as of 1
August 2015. The estimated impact on Fortum is approximately EUR 15 million in
2016, albeit corporate tax-deductible. The future of the nuclear tax is subject
to active political debate in Sweden.
OKG AB decided earlier to permanently discontinue electricity production at
Oskarshamn unit 1 and start decommissioning after permission for service
operation has been granted by the relevant Swedish authorities. The precise
date for discontinuing production and starting decommissioning has now been
decided to 30 June 2017. Oskarshamn unit 2, which has been out of operation
since June 2013 due to an extensive safety modernisation, will stay out from
operation. The closing processes are estimated to take several years.
Russia
The Russia segment's new capacity generation built after 2007 under the Russian
Government's capacity supply agreement (CSA) is a key driver for earnings
growth in Russia, as it is expected to bring income from new volumes sold and
also to receive considerably higher capacity payments than the old capacity. It
receives guaranteed capacity payments currently for a period of 10 years. A
draft regulation related to the time frame (10 vs.15 years) regarding the
calculation of capacity payments has been submitted for review to the federal
executive authorities, and a decision is expected during the first half of
2016. The received CSA payment will vary depending on the age, location, size
and type of the plants as well as on seasonality and availability. CSA payments
can vary somewhat annually because they are linked to Russian Government
long-term bonds with 8 to 10 years maturity. In addition, the regulator will
review the earnings from the electricity-only market three years and six years
after the commissioning of a unit and could revise the CSA payments
accordingly.
According to the new rules approved by the Russian Government in 2015, the
competitive capacity selection for generation built prior to 2008 (CCS, without
capacity supply agreements) takes place annually. At the end of 2015, the CCS
for 2016 and the long-term CCS for 2017-2019 were held. The majority of
Fortum’s plants were selected. The volume of Fortum’s installed "old" capacity
not selected in the auction totalled 195 MW (out of 2,257 MW) for which Fortum
has obtained forced mode status, i.e. it will receive payments for the
capacity. In 2016, the CCS for year 2020 will take place.
In 2014, the new heat market model roadmap proposed by the Ministry of Energy
was approved by the Russian Government; if implemented, the reform should give
heat market liberalisation by 2020 or, in some specific areas, by 2023.
The targeted operating profit (EBIT) level of RUB 18.2 billion in the Russia
segment is expected to be reached during 2017-2018. The segment’s profits are
impacted by changes in power demand, gas prices and other regulatory
development. Economic sanctions, the currency crisis, oil prices and the surge
in inflation have impacted overall demand. As a result, gas prices and
electricity prices have not developed favourably as expected. As forecasted by
the Russian Ministry of Economic Development, the Russian annual average gas
price growth is estimated to be 4.9% in 2016.
The euro-denominated result level will be volatile due to the translation
effect. The income statements of non-euro subsidiaries are translated into the
Group reporting currency using the average exchange rates. The Russia segment's
result is also impacted by seasonal volatility caused by the nature of the heat
business, with the first and last quarter being clearly the strongest.
Restructuring of TGC-1 according to strategy in Russia
In December 2014, Fortum, Gazprom Energoholding LLC and Rosatom State
Corporation signed a protocol to start a restructuring process of the ownership
of TGC-1 in Russia. The discussions have not yet come to a conclusion. It is
not possible to estimate the timetable.
Capital expenditure and divestments
Fortum currently expects its capital expenditure, excluding acquisitions, for
its continuing operations in 2016 to be approximately EUR 650 million. The
annual maintenance capital expenditure is estimated to be about EUR 300-350
million in 2016, below the level of depreciation.
Taxation
The effective corporate income tax rate for Fortum in 2016 is estimated to be
19–21%, excluding the impact of the share of profits of associated companies
and joint ventures, non-taxable capital gains and non-recurring items.
Hedging
At the end of March 2016 approximately 60% of Power and Technology's estimated
Nordic power sales volume was hedged at approximately EUR 30 per MWh for the
rest of the year 2016. The corresponding figures for the 2017 calendar year
were approximately 30% at approximately EUR 28 per MWh.
The reported hedge ratios may vary significantly, depending on Fortum's actions
on the electricity derivatives markets. Hedges are mainly financial contracts,
most of them Nasdaq Commodities forwards.
Dividend payment
The Annual General Meeting decided to pay a dividend of EUR 1.10 per share for
the financial year that ended 31 December 2015.
The record date for the dividend was 7 April 2016, and the dividend payment
date was 14 April 2016.
Espoo, 27 April 2016
Fortum Corporation
Board of Directors
Further information:
Pekka Lundmark, President and CEO, tel. +358 10 452 4112
Timo Karttinen, CFO, tel. +358 10 453 6555
Investor relations& financial communications, Sophie Jolly, tel. +358 10 453
2552, Rauno Tiihonen, tel. +358 10 453 6150, Marja Mäkinen, tel. +358 10 452
3338 and investors@fortum.com
Media, Corporate Press Officer, Pauliina Vuosio, tel. + 358 50 453 2383
The condensed interim report has been prepared in accordance with International
Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the
EU. The interim financials have not been audited.
Reporting and Capital Markets Day in 2016:
Publication of financial results in 2016:
- January-June on 20 July 2016 at approximately 9:00 a.m. EEST
- January-September on 25 October 2016 at approximately 9:00 a.m. EEST
Fortum's Capital Markets Day is planned to take place on 16 November 2016 in
Helsinki.
Distribution:
Nasdaq Helsinki
Key media
www.fortum.com
More information, including detailed quarterly information, is available on
Fortum’s website at www.fortum.com/investors
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